WRA headquarters

Super-sized Deficit Faces New Legislature

Michael Theo |
December 09, 2008

Recently victorious legislative candidates are probably having
second thoughts these days about the jobs they fought so hard to
win. Tightening credit markets, stock market implosions and
declining tax revenues have created the worst potential budget
deficit in Wisconsin’s history.

Between mid-October and mid-November, a projected $1.5 billion
budget deficit ballooned into a $5.4 billion potential crisis. If
it materializes, a deficit of that magnitude will represent 12.5
percent of the overall budget, which would top the previous
mega-deficit in 2003 of $3.2 billion, which constituted 9.5 percent
of the state budget.

Wisconsin is not the only state facing major budget problems.
Forty-one states are facing budget deficits, according to one
national report. Some estimates predict state deficits could reach
$100 billion by 2010, or 13-14 percent of the total value of all
state budgets. With the potential for states to respond with deep
cuts to infrastructure investments, education, government
services and state employees and/or significant tax increases,
congressional leaders and President-elect Obama are considering a
federal government bailout for state governments. However, a
decision on this will likely not be made until after Obama is sworn
in as president on January 20, 2009.

As revenues shrink, the Doyle administration has directed state
agencies to go back to the budget drawing board to make more
spending cuts. On November 14, Department of Administration
Secretary Michael Morgan told state agency heads to find ways to
cut spending even deeper than the 10-percent cuts ordered earlier.
He directed agencies to “carefully review all activities to
identify redundancies, low-priority programs and new ways of doing
business.” One thing to keep in mind is that the $5.4 billion
projected deficit figure is calculated in part by assuming agency
requests for spending increases in the upcoming budget. Given
the current fiscal environment, it is likely that most of
those requests will be denied. The governor is currently working on
the 2009-11 biennial budget, which he is expected to introduce in
February.

It is too early to say which state programs will be cut and by
how much, but the state’s largest expenditures will be under
intense scrutiny. According to a report by the Wisconsin Taxpayers
Alliance, the “Big 5” spending programs in state
government are:

K-12 schools: $5.94 billion (44 percent of
spending)

Medicaid: $1.72 billion (13 percent of
spending)

Corrections: $1.076 billion (8 percent of
spending)

Univ. of Wisconsin: $1.075 billion (7.9 percent of
spending)

Shared revenues: $946
million (7 percent of spending)

These programs constitute nearly 80 percent of the state general
purpose revenue budget and thus could face significant cuts if the
budget is to be balanced without major tax increases.

Governor Doyle has indicated that his preference is to avoid
raising general taxes such as income or sales taxes. But as the
deficit grows, so does pressure to balance the books with some tax
increases as well. Many observers expect that revenue enhancers
supported by Doyle and many Democrats last session, but
successfully defeated by Republicans, will be reintroduced in the
new budget. These taxes include a hospital gross receipts tax and a
tax on oil companies. With Democrats now in control of both houses
of the Legislature as well as the governor’s office, these
tax increases will likely become law next session.

It’s too early to predict how the governor and the
Legislature will choose to proceed, but it seems increasingly clear
that it would be impossible to balance a $5.4 billion deficit with
all cuts or all tax increases. Some combination seems inevitable.
As policymakers ponder their choices, the Wisconsin REALTORS®
Association will be making the case that raising the cost of real
estate transactions would deepen and prolong the recession,
creating additional hardships for Wisconsin families, and thus
should be avoided at all costs.

Real estate has always been the leading economic indicator and
will lead the state and national economies out of the current
recession. Any new policies that increase the cost or frustrate the
process of transferring real property in Wisconsin will only worsen
and extend our current economic problems. Policymakers should
instead concentrate on actions that would reduce the cost of real
estate transactions and encourage credit-worthy buyers and sellers
to re-enter the marketplace and get our state and national
economies moving again.

Michael Theo is Vice President of Legal and Public Affairs
for the WRA.